Sardines, Old Maid and Musical Chairs
“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, ‘You don’t understand. These are not eating sardines, they are trading sardines.’
There is great allure to treating stocks as pieces of paper that you trade. Viewing stocks this way requires neither rigorous analysis nor knowledge of the underlying businesses. Moreover, trading in and of itself can be exciting and, as long as the market is rising, lucrative. But essentially it is speculating, not investing. You may find a buyer at a higher price—a greater fool—or you may not, in which case you yourself are the greater fool.” – Excerpt from “Margin of Safety” by Seth Klarman
USAGOLD note: This Seth Klarman anecdote reminds us of the quote from Maynard Keynes on the Old Maid and Musical Chairs:
“For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passed the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.” – John Maynard Keynes
“No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counter-party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.” – Alan Greenspan, former chairman of the Federal Reserve
Image courtesy of the British Museum Collection/Lydia, croesid, ca 550 BC
Repost from 10/15/2018
“But with Europe stumbling from crisis to crisis, the German public has grown uneasy about keeping the gold abroad. Some even argue the world’s second biggest bullion reserve may be needed to back a new deutschmark, should the euro zone break up.” – Reuters, 2-9-2017
“Germany has a stronger relationship with gold than most nations. The country’s experience with hyperinflation between 1919 and 1923, during the years of the Weimar Republic, is ingrained in the national consciousness. Gold, above all, stands for stability” – Financial Times, 11-10-2017
Germany this year (2017) completed its scheduled transfer of national gold reserves from the New York Fed and the Bank of France. Germany will now leave 1236 tonnes at the New York Fed and another 432 tonnes in London. The remainder of its 3378-tonne national holding will be stored in Frankfurt. The repatriation transfers to Frankfurt were completed three years ahead of schedule.
With respect to the gold left at the Fed, Bundesbank’s Carl-Ludwig Thiele told reporters: “We have a lot of discussions about (U.S. President Donald) Trump, regarding implications on monetary policy, macroeconomics, etc., but we trust the central bank of the U.S.”
Thiele’s confidence in the Federal Reserve brings to mind an old story about Germany’s relationship with the Federal Reserve and the storage of its gold reserves. When Hjalmar Schacht, head of Germany’s central bank in the 1920s, visited the New York Fed he asked to see Germany’s gold stored in its vaults.
“Strong**,” wrote Schacht in a 1955 autobiography, “was proud to be able to show us the vaults which were situated in the deepest cellar of the building and remarked: ‘Now, Herr Schacht, you shall see where the Reichsbank gold is kept.’ ” Storage staff went off to retrieve the gold. “At length,” Schacht goes on, “we were told: ‘Mr. Strong, we can’t find the Reichsbank gold.’ ” To which Schacht replied: “Never mind; I believe you when you say the gold is there. Even if it weren’t you are good for its replacement. ”One need presume that nearly 100 years later, the level of trust conveyed by Schacht remains in place.
It is unlikely that Germany would depart the euro anytime soon and back a new Deutschmark with gold. Having an asset set aside, though, that is detached from erratic national currencies in this day and age is a wise move for the prudent nation-state – just as it is for the prudent private investor.
** New York Fed president at the time, Benjamin Strong
Repost from 2/10/2017, updated October, 2018. The Financial Times article linked at the top of the page tells the fascinating inside story of Germany’s gold repatriation.
“When the going gets rough, the 1 percent start selling. That’s the finding of a new paper that says people with the highest income bailed from stocks disproportionately on the worst days of the financial crisis. The share of selling by the biggest earners rose ‘sharply’ in days following spikes in volatility, according to data on millions of sales reported to the government in 2008 and 2009.” – Joseph Cioli, Bloomberg
USAGOLD note: Apparently, the super rich did not heed the typical appeals by stock brokers and financial advisors in such situations to ride it out.
Repost from May 2016
“The OMFIF research document – the ‘Seven Ages of Gold’ – contains detailed statistics plotting long-run changes in central banks’ policies on buying and selling gold over seven distinct periods during the past two centuries, each lasting an average of around 30 years. The latest ‘Rebuilding’ Period VII has been underway since the financial crisis in 2008. In these eight years, central banks in both developed and developing countries have shown a new fondness for the yellow metal, rebuilding gold’s importance as a bedrock of most countries’ foreign reserves.” – Official Monetary and Financial Institutions Forum
USAGOLD note: We should keep in mind that changes in central bank behavior in the aggregate with respect to gold accompanies times of fundamental change in the global monetary system. As such, the change to central banks becoming net buyers of the metal (and one should not discount the importance of official sector sales abstinence in the equation) signals something important might be in progress. There has been a noticeable increase in central bank purchases in the latter half of 2018 in response to the latest emerging country crisis. Countries like Poland, Hungary and India have added gold to their reserves for the first time in decades. If we are ten years into an average thirty-year process, as OMFIF asserts, it is a market dynamic worth filing for future reference. OMFIF attributes central bank demand as a “factor in the price recovery since 2015.”
Repost from 9/25/2016 [Updated, 11-23-2018]
“If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.
There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, ‘dizzy with success’, to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.”
Frederich von Hayek, 1974 (Speech in acceptance of the Nobel Prize for economics)
“Sometimes it’s hard to tell whether inflation or deflation is the bigger threat. When you can’t tell what to do, plan for both. A diversified portfolio that includes allocation to investments that fare well during inflationary periods and investments that fare well during deflationary periods can provide a measure of protection regardless of what happens in the economy.”
USAGOLD note: A gold diversification can go a long way in protecting against either or both and all the hybrids in between. Please see: Black Swans, Yellow Gold – How gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation.
Repost from July, 2018
“The durable market rise that began March 6, 2009, is as intoxicating as the Lehman anniversary should be sobering: Nothing lasts. Those who see no Lehman-like episode on the horizon did not see the last one.”
USAGOLD note: This time around no one can claim that they weren’t warned or that they didn’t see it coming as was universally the case in 2008. Now the warnings come almost daily.
Repost from August 19, 2018
“Here is why [Nomura’s Richard] Koo is confident that it is only a matter of time before Trump directly intervenes in the FX market:
‘A protectionist policy that must be individually tailored to each product category requires large numbers of administrative staff, and a period must be established during which companies can apply for exemptions. Exchange rate-based adjustments, on the other hand, entail no such costs. In that sense, the more problematic administrative delays become and the more industry opposition mounts, the greater the likelihood that President Trump will replace tariffs with exchange rates as his main tool for addressing US trade imbalances.’
The loudest warning to date that Trump could rock the currency world has come from Charles Dallara, the former U.S. Treasury official who was one of the architects of the Plaza Accord, the 1985 agreement between the U.S. and four other countries to jointly depreciate the dollar. ‘The trade debate will increasingly include the currency issues,’ he told Bloomberg ‘It’s inevitable.'”
USAGOLD note: This article tells how the White House could offset the Fed’s interest rate policies in terms of their effect on the trade wars and the strong dollar. An intervention like what is discussed at the link above, in our estimation, would have a major impact on the gold market.
Repost from August 22, 2018
In light of Treas Sec Mnuchin’s comments today (see DMR), it seems former Treasury offical Charles Dallara was prescient in his comments back in late August. Also, a reminder that the president has options on the dollar other than simply lobbying the Fed.
REPOST from March 13, 2018
“By way of confession and truth to podcast – let’s see, I confessed I was born in 1946 and that makes me, like, 37? Okay, I was born in 1946 and I was bullish on gold in 1945. I hope that puts my view on this into context. I’m chronically, sometimes profitably, but certainly very nearly continuously, well-disposed to the legacy monetary asset. I think that so many arrows point to it in the present day. I think it will become the beneficiary of – I’m talking about gold now – gold will become the beneficiary of so many trends. From the tinkering and the unprecedented experimentation of our central bankers’ fiscal profligacy – I’m starting to sound moralistic – I think that paper money is in a secular bear market and that the institution of managed currency will be seen to be a species of pretense, if not outright intellectual fraud. And I use that word advisedly. And I think that come the dropping of the scales from the eyes of the money holders of the world, gold will do better against almost every currency.” – James Grant/Interest Rate Observer
USAGOLD note: The interview linked above is well-worth your time if you want to better understand the bond market and what might lie ahead for investors. “[S]omething to bear in mind,” says Grant, “is that nobody issues a press release at the start of an inflationary cycle.”
“In his most recent call, [John Hussman] argued that measured ‘from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq-100 Index, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.’”
USAGOLD note: Trees, as Richard Russell used to say, do not grow to the sky.
Repost from July, 2018
Trees don’t grow to the sky
“In the end, trees don’t grow to the sky, and few things go to zero. Rather, most phenomena turn out to be cyclical.” ― Howard Marks, Oaktree Capital
Marks’ observation resides at the philosophical core of the enlightened gold owner. Why? Because he or she understands the cyclical certainty (or is it uncertainty?) of markets and the economy, indeed the cyclical certainty in the grand scheme of things of which the investment markets are only a small part.
“A true cycle,” says historian Arthur Schlesinger, “is self-generating. It cannot be determined, short of catastrophe, by external events. Wars, depressions, inflations may heighten or complicate moods, but the cycle itself rolls on, self-contained, self-sufficient and autonomous. . .The roots of cyclical self sufficiency lies deep in the natural life of humanity. There is a cyclical pattern in organic nature — in the tides, in the seasons, in night and day, in the systole and diastole of the human heart.”
At no point along the historical continuum are we ever at an end, nor are we ever at a beginning, and all along the way the twists and turns of the cycle will be sudden and unpredictable. That, in a nutshell, is why people own gold.
In the end, the enlightened gold owner might buy into the latest investment fad and run with the crowd, if he or she so chooses. It is fundamentally better though to engage the madness of crowds with one’s safety net solidly in place.
I will leave you with a final observation from the famed investor, Bernard Baruch, one of the original Wall Street contrarians who made a fortune betting against the crowd. In the late 1920s, he became a gold owner because he was “commencing to have doubts about the currency.”
“Have you ever seen in some wood,” he asks, “on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam? …Yes? …Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective.”
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